ZeroHedge ran an interesting article yesterday, IMF Prepares For Global Cataclysm, Expands Backup Rescue Facility By Half A Trillion For "Contribution To Global Financial Stability", stating that the IMF will surcharge larger developed countries to raise an enormous amount of money for what apparently is preparation for a massive increase in default risk throughout the world. One of the countries in line for a significant charge is Ireland. This is interesting, for it plays directly into the Pan-European Sovereign Debt Crisis theory that we have been working for all of 2010. It is our belief that the very real threat of defaults will reverberate throughout a material portion of Europe. Even countries that are supposed to be on the right track, are in reality, skating the brink of insolvency. A forensic look of Ireland brings this thesis into focus.

I was having a conversation with a very respectable young man from the press, and he asked me the following question, "Last week, I remember you saying that you thought Greece would default and that could put Europe into recession or worse. Does the fact that Greece was able to raise debt in the past few days change your view on that?".

I thought I would post my answer to the blog, for I want my views on this to be crystal clear.

Answer: Absolutely not! Greece has three primary problems.

a. One, it has cash flow issues. The recent bailout "promise" potentially alleviates the cash flow issues, and at the same time exacerbates them. Although the 5% rate promise that was offered is less than the market is charging, it is still more than what will put Greece on sustainable footing. In addition, since this (4th) bailout "promise" was announced (and still has to be voted on), Greek banks, stocks and bonds have tanked further, as well as Greece being but on rating watch negative by the ratings agencies (one of the very few times we agree on something). I warned months ago about the very banks that have collapsed (price wise), stating that they were virtually guaranteed to see hard times. See the Greek banking attachment included (banks exposed to central and eastern Europe and the Greek Banking Fundamental tear sheet). I warned this time last year about the Spanish banks. We shall see if that warning bears fruit as well.

Let’s get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying “How the hell did he know that?”

The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain’t so and I’m not going to lie to you. The truth of the matter is I sniffed these incongruencies out because 2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating “This time is different”, “There is a new math” (as if there was something wrong with the old math), etc. and so on and associated bullshit.

So, the question remains, why is it that a lowly blogger and small time individual investor with a skeleton staff of analysts can uncover systemic risks, frauds and insolvencies at a level that it appears the SEC hasn’t even gleaned as of yet? Two words, “Regulatory Capture”. You see, and as I reluctantly admitted, it is not that I am so smart, it is that the regulator’s goals are not the same as mine. My efforts are designed to ferret out the truth for enlightenment, profit and gain. Regulators’ goals are to serve a myriad constituency that does not necessarily have the individual tax payer at the top of the heirachal pyramid. Before we go on, let me excerpt from a piece that I wrote on the topic at hand so we are all on the same page: How Regulatory Capture Turns Doo Doo Deadly

First off, some definitions:

The Doo Doo, as in the Doo Doo 32: A list of 32 banks that I created on May 22, 2008 which set the stage for my investment thesis of shorting the regional banks. At that time, I was one of the very few, if not one of the only, to warn that the regional banks would hit the fan.

Regulatory capture (adopted from Wikipedia): A term used to refer to situations in which a government regulatory agency created to act in the public interest instead acts in favor of the commercial or special interests that dominate in the industry or sector it is charged with regulating. Regulatory capture is an explicit manifestation of government failure in that it not only encourages, but actively promotes the activities of large firms that produce negative externalities. For public choice theorists, regulatory capture occurs because groups or individuals with a high-stakes interest in the outcome of policy or regulatory decisions can be expected to focus their resources and energies in attempting to gain the policy outcomes they prefer, while members of the public, each with only a tiny individual stake in the outcome, will ignore it altogether. Regulatory capture is when this imbalance of focused resources devoted to a particular policy outcome is successful at “capturing” influence with the staff or commission members of the regulatory agency, so that the preferred policy outcomes of the special interest are implemented. The risk of regulatory capture suggests that regulatory agencies should be protected from outside influence as much as possible, or else not created at all. A captured regulatory agency that serves the interests of its invested patrons with the power of the government behind it is often worse than no regulation whatsoever.

About a year and a half ago, after sounding the alarm on the regionals, I placed strategic bearish positions in the sector which paid off extremely well. The only problem is, it really shouldn’t have. Why? Because the problems of these banks were visible a mile away. I started warning friends and family as far back as 2004, I announced it on my blog in 2007, and I even offered a free report in early 2008.

Well, here comes another warning. One of the Doo Doo 32 looks to be ready to collapse some time soon. Most investors and pundits won’t realize it because a) they don’t read BoomBustblog, and b) due to regulatory capture, the bank has been given the OK by its regulators to hide the fact that it is getting its insides gutted out by CDOs and losses on loans and loan derivative products. Alas, I am getting ahead of myself. Let’s take a quick glance at regulatory capture, graphically encapsulated, then move on to look at the recipients of the Doo Doo Award as they stand now…

A picture is worth a thousand words…

fasb_mark_to_market_chart.png

So, how does this play into today’s big headlines in the alternative, grass roots media? Well, on the front page of the Huffington Post and ZeroHedge, we have a damning expose of Lehman Brothers (we told you this in the first quarter of 2008, though), detailing their use of REPO 105 financing to basically lie about their liquidity positions and solvency. The most damning and most interesting tidbit lies within a more obscure ZeroHedge article that details findings from the recently released Lehman papers, though:

On September 11, JPMorgan executives met to discuss significant valuation problems with securities that Lehman had posted as collateral over the summer. JPMorgan concluded that the collateral was not worth nearly what Lehman had claimed it was worth, and decided to request an additional $5 billion in cash collateral from Lehman that day. The request was communicated in an executive?level phone call, and Lehman posted $5 billion in cash to JPMorgan by the afternoon of Friday, September 12. Around the same time, JPMorgan learned that a security known as Fenway,which Lehman had posted to JPMorgan at a stated value of $3 billion, was actually asset?backed commercial paper credit?enhanced by Lehman (that is, it was Lehman, rather than a third party, that effectively guaranteed principal and interest payments). JPMorgan concluded that Fenway was worth practically nothing as collateral.

Hold up! Lehman was pledging as collateral allegedly “investment grade”, “credit enhanced” securities that were enhanced by Lehman, who was insolvent and in need of liquidity, itself. For anybody who is not following me, how much is life insurance on yourself worth if it is backed up by YOU paying out the proceeds after you die bankrupt? Lehman was allowed to get away with such nonsense because it was allowed to value its OWN securities. Think about this for a second. You are in big financial trouble, you have only a $10 bill to your name, but your favorite congressman (whom you have given $10 bills to in the past) has given you the okay to erase that number 10 on the $bills and put whatever number on it you feel is “reasonable”. So, when your creditors come a callin’ , looking for $20 in collateral, what number would you deem reasonable to put on that $10 bill.

Ladies and gentlemen, in the short paragraph above, we have just encapsulated the majority of the mark to market argument. Let’s delve farther into the ZH article:

By early August 2008, JPMorgan had learned that Lehman had pledged self-priced CDOs as collateral over the course of the summer. By August 9, to meet JPMorgan’s margin requirements, Lehman had pledged $9.7 billion of collateral, $5.8 billion of which were CDOs priced by Lehman, mostly at face value. JPMorgan expressed concern as to the quality of the assets that Lehman had pledged and, consequently, Lehman offered to review its valuations. Although JPMorgan remained concerned that the CDOs were not acceptable collateral, Lehman informed JPMorgan that it had no other collateral to pledge. The fact that Lehman did not have other assets to pledge raised some concerns at JPMorgan about Lehman’s liquidity

Hmmm!!! Three day old fish has a fresher scent, does it not? So where was the SEC, the NY Fed, or anybody the hell else who’s supposed to safeguard us against this malfeasance? Even bloggers picked up on this months before it collapsed. The answer, dear readers: REGULATORY CAPTURE!

Again, from ZH:

The SEC was not aware of any significant issues with Lehman’s liquidity pool until September 12, 2008, when officials learned that a large portion of Lehman’s liquidity pool had been allocated to its clearing banks to induce them to continue providing essential clearing services. In a September 12, 2008 e?mail, one SEC analyst wrote: Key point: Lehman’s liquidity pool is almost totally locked up with clearing banks to cover intraday credit ($15bnjpm, $10bn with others like citi and bofa). withThis is a really big problem.

BoomBustBlog featured several warnings starting January of 2008!

One would think that after all of this, the problem would have been rectified. To the contrary, it has been made worse. Congress has pressured FASB to institutionalize and make acceptable the lies that Lehman told its investors, counterparties and regulators. That’s right, not only will no one get in trouble for this blatant lying, the practice is now actually endorsed by the government – that is until somebody blows up again. At that point there will be a bunch of finger pointing and allegations and claims such as “But who could have seen this coming”.

April 7 (Bloomberg) -- Greece may discover it’s no cheaper to sell bonds in the U.S. than in Europe as the government seeks to persuade investors it can plug the region’s biggest budget deficit.

Investors may demand a yield of as much as 7.25 percent to buy Greek 10-year dollar bonds, 410 basis points more than benchmark German bunds and 330 basis points more than Treasuries, according to Paris-based Axa Investment Managers, which oversees about $669 billion. TCW Group Inc., which manages $115 billion in assets from Los Angeles, says Greece may have to offer a premium of as much as 400 basis points over Treasuries.

Petros Christodoulou, director general of Greece’s Public Debt Management Agency, said March 31 the country planned a “roadshow” in the U.S. and maybe Asia to drum up investor demand for a sale of dollar-denominated bonds. The country may offer as much as $10 billion of the securities, the Wall Street Journal reported the same day. Greece is struggling to tackle a budget deficit that is equivalent to 12.7 percent of gross domestic product, more than four times the European Union’s 3 percent limit.

Greek banks are being hit by a wave of redemptions as rich citizens and companies look to move their money to big global banks or offshore as the country's debt crisis rages, the Telegraph newspaper reported on its website.

The report appeared to contradict recent data from the European Central Bank and comments to Reuters by analysts and Greek banking sources, who said there was no clear evidence of a major, extended deposit outflow from Greek banks.

The UK newspaper said late on Monday that big depositors have been clamoring to move their cash to international financial firms such as HSBC or France's Societe Generale, which operate large branches in the country.

They are among those to have received several billion euros of new money, it said without specifying sources.

... More than 3 billion euros ($4.05 billion) of deposits held by Greek households and companies left the country in February, while in January about 5 billion euros of deposits were moved out, the Telegraph quoted figures from Bank of Greece as showing.

Switzerland, the UK and Cyprus have been the largest recipients of the money, with the wealthiest Greeks looking to move their deposits to Swiss banks accounts to escape the more punitive tax measures many fear will be introduced in the wake of the country's economic crisis, the newspaper said.

I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined "Name Brand Investing". Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street's most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning...

Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm which included riveting detail on the firm’s accounting practices. That report has put in sharp relief what many of us have expected all along: that fraud and potential criminal conduct were at the heart of the financial crisis.

... Only further investigation will determine whether the individuals involved can be indicted and convicted of criminal wrongdoing.

I have warned my readers about following myths and legends versus reality and facts several times in the past, particularly as it applies to Goldman Sachs and what I have coined "Name Brand Investing". Very recent developments from Senator Kaufman of Delaware will be putting the spit-shined patina of Wall Street's most powerful bank to the test. Here is a link to the speech that the esteemed Senator from Delaware (yes, the most corporate friendly state in this country). A few excerpts to liven up your morning...

Mr. President, last Thursday, the bankruptcy examiner for Lehman Brothers Holdings Inc. released a 2,200 page report about the demise of the firm which included riveting detail on the firm’s accounting practices. That report has put in sharp relief what many of us have expected all along: that fraud and potential criminal conduct were at the heart of the financial crisis.

... Only further investigation will determine whether the individuals involved can be indicted and convicted of criminal wrongdoing.

I was not going to bother to comment further, but after hearing pundit after pundit attack Obama for the bank levy and Glass Steagal 'lite', after banks allegedly paid their dues... I just couldn't take it anymore.

Yes! Obama has made a lot of policy errors in dealing with the banks. Yes! I believe he has not solved the problems, but has chased the symptoms. The separation of prop trading from deposit banking IS the RIGHT thing to do. In addition, the banks have not come anywhere NEAR repaying their debt to the government. Not even close.

Yes, some of the banks repaid TARP, with interest and warrants. Okay. The investment big banks (that were still in existence) were offered expedited financial holding company (bank) charters. That is why they didn't fail, at least in part.

So, running down the list, the banks paid back TARP. That's a +, but....